Guide to Asset Allocation for Your Retirement Portfolio

Determining the right asset allocation for your retirement portfolio is one of the most important decisions you’ll make as an investor. Your asset allocation will essentially determine how you diversify your investments. It’s crucial that your allocation aligns with your financial goals, risk tolerance and investment timeline.

To add to the complexity, asset allocation isn’t something that you set once and forget about for the rest of your life. As you get older, your risk tolerance and investment timeline will change—and your asset allocation should change along with them. Your asset allocation as you save for retirement will likely be different from your asset allocation when you’re retired.

Below, we take a brief look at what retirement asset allocation is and why it’s important. We also discuss allocation changes by age and offer different methods you can use as you approach and enter retirement.

How does asset allocation work?

Asset allocation is a term we use to refer to the specific mix of asset classes that an investor holds in their portfolio. Most commonly, this will involve some mix of stocks and bonds, but it can also include other types of investments, such as real estate, commodities and more.

With any investment comes risk—which is where diversification comes in. When building a portfolio, you’ll decide how much risk you’re willing to take, called your risk tolerance. Your risk tolerance will depend on when you’ll need your money, your investment goals, and how comfortable you feel with fluctuations in your account value. Based on your risk tolerance, you’ll invest certain percentages of your investable assets in different asset classes with different risk profiles, which react to market conditions differently.

If you’re looking to carry less risk, you’ll invest more in low-risk investments that’ll reduce the potential you’ll lose money but also limit your potential to gain. If you’re able to carry more risk, you’ll put more money into the stock market, which is a high-risk, high-reward investment.

All portfolios will include a mix of both low-risk and high-risk investments—the balance will depend on your risk tolerance. For example, in a 60/40 portfolio, 60 percent would be allocated to stocks, and 40 percent would be allocated to bonds.

What is the proper asset allocation by age?

Generally, the younger you are, the more risk you can take. Why? Because you have more time to make up for any losses you may experience before you need your money.

But as you get older, your investment timeline gets shorter, and you have less time to recover from significant losses. This is why professionals typically recommend that you shift the balance of your portfolio over time to move toward a more and more conservative mix as you near retirement. You’ll likely start to gradually allocate a greater percentage of your portfolio to fixed-income investments (like bonds), which will offer a lower rate of return in exchange for more stability and predictability.

Once you’re in retirement and living off your savings, your portfolio will likely become even more conservative. You’ll still want a certain portion dedicated to stocks to provide some opportunity for growth, but your top priorities will most likely be to preserve wealth and generate income.

If you’re looking specifically at your asset allocation for retirement, your portfolio might look something like this:

• 20-year-old investor: 100 percent stocks, 0 percent bonds

• 30-year-old investor: 90 percent stocks, 10 percent bonds

• 40-year-old investor: 80 percent stocks, 20 percent bonds

• 50-year-old investor: 70 percent stocks, 30 percent bonds

• 60-year-old investor: 60 percent stocks, 40 percent bonds

• 70-year-old investor: 50 percent stocks, 50 percent bonds

Your asset allocation at any given point, however, will be less dependent on your age and more dependent on your risk tolerance and financial goals and timeline. For example, if you have a hard time tolerating market fluctuations or are planning to retire early, your personal asset allocation may look different.

Target-date funds can help with proper asset allocation

While periodic rebalancing is an important part of investing for the long term, it’s also something that many investors are unfamiliar with. As a result, some investors don’t shift their balances, which leaves them with a portfolio that doesn’t match their investing timeline or risk tolerance.

The good news is that there are options that can do the heavy lifting for you.

One such option is a target-date fund. Like other funds, such as ETFs and mutual funds, target-date funds invest in a diversified basket of assets and asset classes. As you get closer and closer to retirement (the “target date”), these funds automatically rebalance to become more conservative.

You’ll typically pay slightly higher fees for a target-date fund compared to building and managing your own portfolio, but you can have confidence that you’re carrying the right retirement asset allocation at the right time.

Using annuities for retirement

Even a conservative retirement portfolio is not free of risk. Making sure that your asset allocation is properly aligned with your age helps to reduce risk, but in investing, there are no guarantees.

With this in mind, you may decide to purchase an annuity as part of your retirement portfolio. Doing so can significantly reduce your risk of principal loss. In addition, annuities help protect you from another key risk to your retirement—that you may live longer than your assets can provide for. The guaranteed payments from an annuity will typically last for the rest of your life—regardless of how long you live and how the market performs.

What is a good asset allocation for retirement?

The ideal asset allocation for your retirement portfolio will depend on your risk tolerance, investment goals and timeline, and your broader financial picture. It’s a personal decision—one that’s best made within the context of your larger financial plan.

If you’re unsure about the type of assets you should be invested in, what percentage of your portfolio should be dedicated to each of those assets, or how and when to shift the balance of your assets as you near retirement, your financial advisor can help.

Your advisor can help you design a savings plan for retirement that matches your needs. And as your needs change, they’ll meet with you to recalibrate your asset allocation.

All investments carry some level of risk, including loss of principal invested. All guarantees in annuities are backed solely by the claims-paying ability of the issuer. No investment strategy can assure a profit and does not protect against loss in declining markets.

Exchange traded funds (ETFs) have risks and trade similar to stocks. Shares of ETFs are bought and sold in the market at a market price, as a result, they may trade at a premium or discount to the fund's actual net asset value. Investors selling ETF shares in the market may lose money including the original amount invested.

With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. When interest rates are at low levels there is risk that a sustained rise in interest rates may cause losses to the price of bonds or market value of bond funds that you own. At maturity, however, the issuer of the bond is obligated to return the principal to the investor. The longer the maturity of a bond or of bonds held in a bond fund, the greater the degree of a price or market value change resulting from a change in interest rates (also known as duration risk). Bond funds continuously replace the bonds they hold as they mature and thus do not usually have maturity dates, and are not obligated to return the investor’s principal. Additionally, high yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.